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Effect of Credit on Interest Rates

A borrower's previous credit and payment history is calculated into a single number - a credit score. This score instantly informs a lender of the requested borrower's past experience with credit. A higher credit score means the borrower is more likely to repay their debts on time. Since this is a low risk investment, a lender would quickly approve this borrower a loan with a low interest rate.

The credit score ranges from 350 (bad credit) to 850 (perfect credit). Since most borrowers have less than perfect credit, it's important to remember a good credit score is 700 or above.

When applying for a personal loan, an important factor a borrower considers is "How much interest will I have to pay?" and "How much will a loan cost me?". When you apply for a loan, your credit score, compiled from your credit history, determines if your interest rate is as low as 6.73% or as high as 35.36%.

For example: You were approved for a $8,000 personal loan with a 11.34% interest rate and 5 year term. The total interest to pay is $907.20 and your monthly payment would be $148.45.

What if the interest rate was changed to 21.55%? The total interest is $1724 and your monthly payments would be $162.06. That's only a difference of $13.61 a month.

It's best to improve your credit score before applying for a loan. However, if you need money fast, a personal loan with a higher interest rate may be best. Check your credit rating and decide what you can afford.